*A Great Leap Forward: 1930s Depression and U.S. Economic Growth*

This book is built around a novel claim: potential output grew dramatically across the Depression years (1929-1941), and this advance provided the foundation for the economic and military success of the United States during the Second World War, as well as for what Walt Rostow (1960) called “the age of high mass consumption” that followed. This view, if accepted, leads to important revisions in our understanding of the sources and trajectory of economic growth to the second quarter of the century and, more broadly, over the longer sweep of U.S. economic history since the Civil War.

…Although the Second World War provided a massive fiscal and monetary boost that eliminated the remnants of Depression-era unemployment, it was, on balance, disruptive of the forward pace of technological progress in the private sector.

During 1929-1941, the annual total factor productivity (measure of economic progress due to new ideas) increase in the trucking sector was 12.61 (!) and for airline transport it was 14.45 (!).

This is a) one of the best economics books of the last ten years, b) one of the best books on the Depression era, c) the only economic interpretation of WWII which makes sense, and is supported by the numbers, and d) one of the must-reads of the year.

With the caveat that I have only read the blog and not the book (which I plan to), I think the story is more complicated. Many of the developments that took place during the 1930s were set in place during the ‘roaring 20s’ when the nascent industrial companies sought to expand and develop dedicated R&D departments. The development of nylon by du Pont was a result of this when they set up the Central Research Station in Wilmington and brought in Wallace Carothers to head up what became the polymer research department (in addition to nylon he also invented neoprene). Also during the depression, engineering was the one curriculum in universities that would result in a job right away (my father was a classic example of this) and the portents of the war to come in Europe sparked developments in the aircraft industry several years before the US entry. One still needs to accept the huge demand side expansion of the industrial output that was war related played a major role in getting us out of the Depression, something that might have taken years longer had not the war intervened. Interesting book and thanks for posting this.

E. BarandiaranApril 25, 2011 at 8:35 am

As you I have yet to read the book too. I want, however, to highlight your point about the continuity of history. Any attempt to explain what happened in a particular period of time depends too much on what happened in the past, particularly in the most recent past. In real life we rarely have the sort of shocks that we like to use to develop theories.

During 1929-1941, the annual total factor productivity (measure of economic progress due to new ideas) increase in the trucking sector was 12.61 (!) and for airline transport it was 14.45 (!).

yes – and that is what was asked when discussing of Great Stagnation – please show those potential technologies which will drive the growth. They are not education ( because it is limited by IQ ), no medical treatment ( at least in near term, and in long term -most probably replacement of organs etc will eliminate medicine almost completely – so no gdp increase ) – so no new inventions here ( even lots of ) will change anything.

There has been at least one study arguing that the stock market was not overvalued in 1929. Field’s research seems to provide a bit of additional support for that conclusion. The stock market had no reason to anticipate a sudden collapse of demand in the early 1930s. But they probably did see technological progress beginning to pick up speed, as factors such as growing use of electrical power and chemicals transformed the economy.

The 1930s should have been a decade of soaring progress, something to match the aesthetics of the late-deco period. Alas, not enough NGDP.

anonApril 25, 2011 at 12:28 pm

Everything looks like a nail with Sumner wielding his NGDP-hammer.

T. ShawApril 25, 2011 at 11:09 am

Is this “must read” intended to ease your anxieties about 9% unemployment and soaring food./fuel prices as “far the the eye can see”?

Benny LavaApril 25, 2011 at 11:58 am

Is it a novel claim? I find that the policies of the depression, especially the Roosevelt administration, are often cast in political limelights rather than objectively assessed for their successes and failures. To be true there were many failures, such as price controls. But were some of the make work programs like the topsoil conservation act and the building of dams and bridges successful or failures? An interesting question, but a difficult one to assess objectively.

My guess is that the cover is a picture of the 1939 New York World’s Fair. People were being shown what the city of the future would look like (1960, I think). I thing people are looking over a model of that futuristic city. Maybe the chairs they are city on were moving them past the model or the model istself was moving.

Some have seriously questioned this perspective “the Second World War provided a massive fiscal and monetary boost that eliminated the remnants of Depression-era unemployment,” They note that WWII actually sopped up consumption by forcing savings, and that it was the postwar release of such savings and restoration of private demand, that led to postwar economic growth. The sentence may be true if the phrase “provided a massive fiscal and monetary boost that” were removed; but in that vein, it should be noted that military conscription provided a considerable amount of the new employment.

I think a major contributor to the early success of the US economy after the depression was the partitioning of the banking industry, which stunted the rapid vertical accumulation of wealth (and limited the slowdown that having wealth concentrated among fewer consumers creates).

Its worth noting, however, that the New Deal was largely an internationalist free-market move for the highly internationally-competitive capital-intensive firms in the US. Before then, the US had not had much international market access. The war was also a major contributor to the internationalization of consumer markets for US capital, which may not be included in your author’s figures. It’s a lot harder to determine the exact value of this effect, too.

Sensitivity to labor class-consciousness was also very high, for what its worth.

“potential output grew dramatically across the Depression years (1929-1941)”

meaning that actual output did not?

Would Marie Antoinette have said to my grandparents, “Let them eat potential output?”

LordApril 25, 2011 at 3:19 pm

I sure hope novel is editorial excess and not a statement on the low level of scholarship in the field of historical economics.

hughzApril 25, 2011 at 7:14 pm

And what exactly have you contributed to _any_ field, Lord?

Mr. EconotarianApril 25, 2011 at 7:46 pm

I think we have to remember the Great Farm Recalculation going on as internal combustion engines dramatically improved farm worker productivity (leading to “Okies” leaving the farm states to go to California for manufacturing and other jobs).

Was the “Long Stagnation” from 1933-1941 just a technological recalculation, or a product of anti-market forces from Washington, DC? I suspect both were going on at the same time.

I look forward to reading the book. But having read and been impressed by his 2003 paper a few years back, I’m happy to see that in the linked Economix post he addresses my main question:

“we should not overlook the important role played by the government. Federal spending was too small prior to the war to compensate for the decline in private sector capital formation and thus close the output gap. But it had big benefits on the aggregate supply side, as it complemented private sector initiative in expanding potential output.”

So by his analysis:

1. Right place, right time — lots of innovations ready to hit the market.

2. Necessity is the mother of invention — the Depression spurred people to try new things out of desperation.

3. Government threw huge money against the wall. Some of it stuck.

Would it have happened without the necessity and desperation? Would it have happened without the government input? When? Field seems to be suggesting that the government input was a necessary cause. Contrafactuals are always tough, but worth wondering.

And Mark, yes: a great deal of the effect was time-lagged due to (extraordinarily) high savings rates during the war (consumer goods shortages, rationing, post-depression frugality, people off fighting instead of home spending, etc.), which were available for spending (consumption and investment) afterwards. I pointed this out to Tyler a while back. the magnitude is kind of staggering:

And why not enough NGDP? because the depression was and *international* economic crisis..

NCApril 27, 2011 at 5:15 am

From Field’s interview.

“In 1941, the U.S. economy produced almost 40 percent more output than it had in 1929″

Ah… Let’s go from through to peak and argue this was all growth in potential GDP. Right.

Mark A. SadowskiMay 7, 2011 at 3:09 pm

1929 *was* a peak year. 1933 was the trough of the Great Depression. So Field *is* making a peak to peak comparison.

Mark A. SadowskiMay 7, 2011 at 3:06 pm

What fascinates me is how libertarian bloggers seem to love Alexander J. Field’s work. Tyler Cowen refers to TFP (total factor productivity, or the residual from in growth after accounting for physical capital and labor accumulation) when making his argument for the Great Stagnation, and has leaned heavily on his research in advancing his argument for example.

A good source of information on historical TFP growth is a few of papers by Field: “US economic growth in the gilded age”, “The Most Technologically Progressive Decade of the Century” and “The origins of US total factor productivity growth in the golden age”.

The first thing that should grab your attention is that TFP growth was at its most rapid during the Great Depression. The second thing you should observe is that TFP growth was at 1.9% or higher from the 1870s through 1973 with the exception of 1892-1919 and 1941-1948. TFP growth has picked up since 1995 (but has slowed since 2005). So this pretty much supports Tyler Cowen’s conjecture concerning the Great Stagnation.

Now, why was TFP growth faster during the periods mentioned? Well, Field analyzes the growth by sector and sector size and comes to some interesting conclusions. TFP growth was fast from the 1870s through 1892 because of railroads (which peaked in track mileage in 1916) and to a much lesser extent because of the telegraph. Almost all growth in TFP in the 1920s can be accounted for by manufacturing and that probably fed that decade’s stock market boom. Why did manufacturing TFP explode in the 1920s? According to Field it was due to the widespread electrification of factories (which had started in the 1880s). In the 1930s manufacturing TFP, although still relatively fast, slowed down. (He also points out that private R&D quintipled from 1929-1941.) But transportation TFP soared from 1929-1941 mainly due to the five fold increase in the share of tons-miles hauled by interstate trucking and its interaction with railroad transportation. (The US built its first interstate highway system in the 1930s.) And he argues that transportation TFP was largely responsible for the growth seen from 1948-1973, as manufacturing TFP actually went negative for part of that period. (And recall the Interstate Highway System, built on top of or paralleling the US Route system of the 1930s was largely completed from 1956-1973.) TFP growth was negative from 1855 to the 1870s primarily because of the Civil War.

Recent work by Bart van Ark shows that TFP in the distribution sector was the main source of the surge in growth from 1995-2005, and he argues that was due to the widespread adoption of ICT technology by that sector. (Think big box Walmarts.)

What’s interesting is that, in his several papers on the subject, and now in his book, Field painstakingly and eloquently lays out the case that Federal government money played a major role in all of those developments with the exception of factory electrification (urban areas were largely electrified with private money), even, and perhaps especially, the internet.